Streaming music has been a huge topic in the music industry for good reason. It’s been the subject of many articles, occasionally one will accurately understand the issues surrounding these hot companies, but most that have no idea of how the music business works. A couple of stories I’ve seen recently made me want to wretch. Interestingly enough, they are on the opposite sides of the debate.
First, there’s this terribly reported and, in some points, just plain wrong article in Take Part by Kathleen Sharp and Scott Timberg with the click-bait title, “Is Spotify Killing Music?” The authors comingle the loss of publishing rights by the heirs of John Steinbeck and Woody Guthrie (who are in a band together – naturally) with the way that artists are getting hosed by big bad streaming companies. Not only do these two topics not belong together, they also weaken the main points of the article (which likely stemmed from a PR pitch promoting the aforementioned band).
The streaming portion of the article is a retread of the greatest hits from anti-streaming voices like David Lowery, Thom Yorke and David Byrne. The evidence it cites is flimsy, even including Lowery’s disputed $16 payment for 1.5 million plays of the Cracker song “Low” on Pandora. The authors even recruit streaming supporters for its purposes, posting a big photo of Billy Bragg with the caption:
British singer-songwriter Billy Bragg has spoken out against royalty rates and structures established by music-streaming companies.
This may indeed be true. But what Billy Bragg said was actually very supportive of streaming.
“I’ve long felt that artists railing against Spotify is about as helpful to their cause as campaigning against the Sony Walkman would have been in the early 80s. Music fans are increasingly streaming their music and, as artists, we have to adapt ourselves to their behavior, rather than try to hold the line on a particular mode of listening to music.”
Bragg went on to cite the problem is really with record labels that are paying streaming rates based legacy deals with artist that only paid a fraction of royalties on sales because of physical production and distribution costs.
“If the (streaming) rates were really so bad, the rights holders – the major record companies – would be complaining. The fact that they’re continuing to sign up means they must be making good money.”
Interestingly enough these comments from Billy don’t even up in the article. Instead we get that streaming is eating into CD sales, without even a slight mention of illegal MP3 downloads, which last time I checked, was the main reason why CD purchases are getting killed.
The next sensationally wretch-worthy item is a guest post in Billboard and his site, Tom McAlevey, CEO of Radical.FM, says this whole discussion is silly because streaming music is already profitable! His evidence? Well, Pandora could be profitable tomorrow if they pumped up the ad load to broadcast radio levels and Spotify was profitable in Sweden before they expanded around the world.
Those seem like factors why streaming music is not profitable rather than proving it is profitable today. Based on everything we know, streaming companies are struggling with profitability and the path to get there is uncertain. Pandora desperately needs growth of users to sell more ads and they must do so while keeping their listeners and investors happy with its progress. Without ad sales growth, the company will not survive. But the answer isn’t increasing the number of ads per hour, which Tom suggests. With too many ads, they’ll bleed customers.
Meanwhile, it is true that Spotify had a great deal of success in Scandinavia, but there are factors that have made the company successful–starting with the fact that digital music sales never took off there because of P2P’s popularity in that part of the world. Spotify became the hometown replacement that was so much easier to use that P2P services.
Tom also mentions that his experience negotiating with major labels back in the nineties allowed him to see the secret numbers that reporters do not have access, as a way of proving his bona fides.
I too have seen these numbers, and my assessment is that major label deals make it extremely challenging to find a way to profitability. There are many veterans in digital music who believe that no company can be profitable, ever. I disagree. There is a path forward, but it’s no easy task.
Both Spotify and Pandora are focused on growth, as Tom mentions. But there’s a reason for it. Their current size and offering aren’t profitable. Period. Both need significant growth and are pursuing it all-out. Spotify needs a worldwide audience to build an advertising channel to attract worldwide brands, as well as take advantage of its worldwide infrastructure for streaming. Pandora desperately needs to be bigger in the US and scale around the world.
Scale is another factor. For all the headlines written about Pandora and Spotify, streaming music is still a fraction of all music consumption and revenue. Spotify’s estimated 25 million free users is a rounding error of YouTube’s massive audience. Pandora is only estimated to be 11 percent of all radio listening in the US. Because all the buzz the companies generate, most people believe that both companies, especially inside the music industry, are much bigger than they are. Both are early stage and must prove themselves as mass-market products to be viable.
Granted, you could say such aggressive growth strategies are required to tap the public markets to create a massive payday for investors, and that’s fair criticism. But this doesn’t mean these companies don’t need to grow. They must grow. Or die.
Look, I understand Tom’s motivations for writing the piece and I agree with it. Digital music has great promise and streaming has attracted throngs of people who love the convenience. Many have chosen streaming as the way they’d like to listen to music. The industry needs to find a way to make the economics for all those who’d rather access music than purchase, rip and organize digital files.
But we need to focus on what’s actually happening, and not create spin and counter-spin. There are real serious issues that must be solved, like ensuring every single artist gets compensated fairly as well as creating experiences that customers find valuable enough to pull out their credit cards. Let’s focus on these instead of trying to demonize startups and misrepresent the facts.
The Good, The Bad, and The Ugly Digital Music Coverage
Take Part: Is Spotify Killing Music?
RadicalFM: Streaming Music Already Profitable
The Trichordist: My Song Got Played On Pandora and All I Got Was $16.98
The Understatement: Pandora Paid $1300 for A Million Plays, Not $16.89
MichaelRobertson.com: Why Spotify Will Never Be Profitable
Consequence of Sound: The Elephant In The Music Room
It really should be a great day for streaming music. After all Nielsen released a report that showed unbelievable growth for the listening format. In the first half of this year streams have increased by 50 percent over the past year. But these numbers also are leading to discomfort for the streaming industry. Because along with the streaming increases are massive declines in all retail formats. CDs, digital tracks and digital albums are all down around 15 percent in the same period.
Today’s numbers clearly demonstrate that consumers greatly favor access to their music over purchasing tracks. What isn’t clear is what this means for the music industry. While the revenue model for a purchase is well understood, we have no clarity on streaming’s value. This is partly because a stream really can’t be equated to a purchase. After all a listen can’t really be compared to a retail event. But the real problem is that streaming services that make up the Nielsen numbers are vastly diverse.
Look, nobody in their right mind is going to compare YouTube and Spotify. But today’s numbers jams several different services with a variety of business models into a single number. It leads us to a question: should we really accept these numbers that don’t tell us anything about the business value?
Discerning A Difference
There are several different streaming products and each one has a different method of providing revenue for the rights holder. Unfortunately, the streaming number Nielsen posted was a single all-in number designed to show huge gains, but not to create clarity. These numbers would actually be revelatory if Nielsen would start tracking and reporting on each of these metrics separately.
As they say at the old ball yard, you can’t keep score without a scorecard. Same with streaming music. And since nobody else is doing it, I thought I’d describe the main streaming sectors and how revenues are generated by each. I’ve also included a few metrics that would help the industry understand the real value of each of these services.
The biggest contributor to Nielsen’s streaming number is ad-supported streams, which is dominated by YouTube’s massive reach and nearly unlimited catalog of music. While it doesn’t have the hype of Spotify or Beats Music, when we in the industry talk about streaming, we’re mostly talking about YouTube. YouTube is free and only generates revenue from advertising that is sold against the plays. Unfortunately, very little of the content on YouTube is monetized and the amount of money it generates per play is unbelievably tiny. Because of YouTube’s scale, a tiny increase in ad sales could vastly increase overall streaming revenues. But it requires significant growth in sales staffing and performance from Google.
Metrics We’d Like to See
-Plays per active
-Revenue per play rate
Comprised of non-interactive services and direct licensed radio, Internet radio includes services like Pandora, IHeartRadio and Slacker. A majority of these pay a stream rate or a percentage of revenue depending if the listener is free or is paying a subscription fee. In the US, Internet radio has performed very nicely. While YouTube can be described as a sampling platform, Internet radio is sticky, with listeners in droves using the services month after month for free, and some even paying to remove ads. The rates are wildly different depending on the deals for both recording and publishing rights. There has been major kerfuffle with this, primarily as Pandora has sought to keep publishing costs at their (nearly unjustifiably) low rate. But it remains a fact that every Internet radio play produces revenue for both rights holders, something that broadcast radio doesn’t do.
Metrics We’d Like to See
-Plays per user
-Number of plays per user
-Number of subscribers
-Lifetime duration of subscribers
-Revenue per play rate for free streams
When people refer to streaming, many times they’re talking about this bucket, which is dominated around the globe by Spotify, but includes Deezer and Rhapsody amongst others. However there are two different types of on-demand streams. Spotify has found that by having a free tier of the service, the company can build a pipeline of potential customers that it can monetize with advertising and convert into the paid tier. A vast majority of users in Spotify don’t pay a dime for the service. Spotify does pay for every free play, but it’s significantly less than the amount of revenue generated by the premium subscribers. That rate is confidential and differs based on the deal with rights holders. However many artists have seen it on their statements as low as one third of a premium play. It is worth noting that others have followed Spotify into the free racket, like Rdio, but services like Beats Music have stayed away from free. It’s also worth noting that the number of people who use an on-demand service pales in comparison to Internet radio or ad supported streaming.
Metrics We’d Like to See
-Revenue per free play
-Revenue per subscriber play
-Lifetime duration of subscribers
It’s A Trap
It’s easy to fall into the trap of pointing the finger at streaming services for the loss of retail sales in music. And there’s probably a whole lot of truth that many consumers who previously purchased music now just access it either for free or paying. But since customers are voting strongly for streaming and we’re committed to building new revenue models as opposed to suing upstarts out of existence, we should be asking much better questions about the streaming business. That’s not only the suit who have their hands on the controls of the business, but also reporters, analysts and industry insiders. We should demand that Nielsen and other market research firms create better metrics that illuminate business value, when instead we get sensationalist reports that deliver big headlines. Good data is good for everybody—especially Nielsen, when we all start obsessing over these metrics like we used to with SoundScan every Wednesday.
Originally posted on Om Malik:
It is not a surprise to me that this $3 billion deal is all about Beats Music. Others seem to agree. The way I see it, Apple CEO Tim Cook is trying to replace some of Steve Jobs’ skills by bringing in the best in business. Angela Ahrendts has the chops to take Apple retail into a new territory. Jimmy Iovine will be running Apple’s content side of the house. Jony Ive is still a powerhouse in design. This is a good approach.
Some say, Apple paid about 2x revenues for Beats from its overseas stash of cash, so it isn’t that expensive a deal. It also allows them to extend into non-Apple markets. That said, despite all the hoopla, Apple’s music business doesn’t make them as much money. And the problems for Apple are elsewhere.
Apple’s Achilles heel is its inability to come to terms with a world…
View original 108 more words
In December of last year Spotify held a press conference to announce the service had finally bagged a big one: longtime-streaming holdout Led Zeppelin. The service now had the band’s legendary catalog of albums, clearing one of the last major artists not on streaming services. The press fell all over themselves raving about what a big deal it was to finally woo the elusive holdout.
In the same press conference Daniel Ek announced something even more important to those involved in digital music. After months, if not years, of negotiations with labels, Spotify announced shuffle play—the ability to play any artist in the Spotify catalog for free on mobile devices. Shuffle play is exactly what it sounds like: a customer can play songs from an artist’s catalog only randomly instead of on-demand. But it does mark the first time that rights holders had allowed a free product on mobile after years of insisting that mobile access was, and always would remain, a paid product.
Spotify was not about to take no for an answer. Daniel Ek clearly has seen the trends in mobile and knows that the world is increasingly connected through their phones. Maybe you can reach scale with free on desktop in Europe and the US. But most of the world only has mobile access. The company had to have a free mobile offering to execute the company’s overall strategy. So Spotify cajoled, threatened, begged, and–most assuredly–wrote a big freaking check, to get free access on mobile.
It’s not the first time that Spotify has done something very difficult that other streaming companies couldn’t get done. It actually has made a habit of it. When Spotify was ready to come to the US, it won over execs nervous that free music would wipe out the world’s richest music market. After a couple years of trying in vain to best The Echo Nest in recommendations, the company bought it outright. When Spotify couldn’t gain label okay for their bundled Sprint deal, it went ahead and launched without all the agreements in place.
Nobody in digital music has the determination, guile, brass and—maybe most importantly—the ability to raise money by the boatload to execute their vision. And on the heels of Apple’s rumored purchase of Beats Electronics, it’s I’m important to understand the difference between a me-too streaming service and a firm as disruptive as Spotify.
A Global Media Channel
Spotify isn’t comparing itself to other music services, or even other digital media companies. Ek sees the company as a worldwide channel of music listening. If someone is listening to music, from Beijing to Auckland to Los Angeles to Nairobi to Stockholm to Rio, Spotify wants to be the customer’s solution.
To execute that strategy the company has created two offerings–a free and a subscription service. Both are extremely challenging businesses build and manage, but just like overcoming label qualms, Spotify is undeterred. Imagine a company deciding to build both Pandora and Beats Music from scratch at the same time and rolling it out around the world.
The services work in tandem. Spotify needs a huge base of free users in order to identify those customers to pay for music and build an audience for advertising. And once a customer uses the product for a fair amount of time, they are hooked. So if they are paying, or just convert into the free tier for a while, it just means another impression for brand advertising.
The company believes in this double-barreled approach to revenue and users will make it the dominant channel of music playback around the world. After rumors the Beats/Apple news floated last week, some in the media wondered if Google would now acquire Spotify. Spotify doesn’t see it that way. The company believes that their main competition is YouTube, the only other global digital media channel.
Faith In Free
Of the two services, the one that requires more of a leap of faith is the free service. Spotify believes that a worldwide audience of music lovers will loosen the pocketbook of global brands who will pay a premium to advertise to the audience. Spotify has already had some success in this arena with a global Coke deal. While most advertising businesses in music focus on local ads, Spotify is different. The company intends to continue to carve off a certain number of customers into the paid tier. And it will need to because the costs of the free service are astronomical.
Why so expensive? It’s all about the content rights. To launch in the United States, Spotify had to work on the labels for a long time, nearly a year, to get the licenses for music. In the end, Spotify agreed to pay for every free play and paid a significant advance—rumors had it around $200 million—to launch in the US. Compare this to YouTube, who has virtually no content costs. But Spotify believes the blend of converting a number of free users to paid, along with the advertising revenue will cover the costs.
Here’s where it gets tricky. While it might make good sense to spread the costs of the free service with paid customers, most folks running subscription music businesses have had a hard time making the model work, due to massive subscriber acquisition costs (SAC) and, maybe most importantly, the rate at which customers leave a service, otherwise known as churn. While Spotify’s SAC is covered in the free product, Spotify will, eventually, have to get their churn to a reasonable level.
But that’s for another day. Today the market is strongly favoring those who can show growth. And Spotify’s growth, in particular with its paid subscribers, has been astounding. The company is privately saying it’s at 10 million subs, though not officially announcing that number.
IPO, Belly-Up or Bailout?
Even with the company’s great vision and uncompromising execution, it’s not clear that Spotify will succeed. The company has raised nearly $600 million in venture funding and remains nowhere near profitable. Spotify is readying an IPO for later this year which will be required as it will need to make more investments to launch into Russia, India and China, territories that are necessary to be a worldwide music channel. But getting an IPO out later this year looks suspect, as there is growing concern that we’re in another tech bubble. If Spotify can’t use the public markets to complete their expansion, it will have to make very painful decisions.
A former colleague, who always was skeptical about their financials, said that Spotify’s future was either to be one of two troubled company’s–Lehman Brothers or General Motors. Once Spotify reaches significant scale of, say, 20 million paying subs and 60 million free users, the company will control enough of label revenues that it’ll be able to demand a much lower rate. At that point the record labels will need to decide if they provide a bailout or let Spotify go belly-up.
One thing is clear. Regardless of the high stakes, Spotify will continue to play their game.
There are two numbers that you need to pay attention to in order to make sense of Apple’s breathtaking acquisition of Beats Electronics. Neither of them is the rumored $3.2 billion price. They are 13.3 and 800 million.
The first number is the percentage that music downloads have decreased in Q1 of this year compared with 2013. This is on the heels of a 5% decrease last year, so it’s looking like the decline is picking up speed. It’s pretty clear that the download era is waning and Apple knows this better than anyone. I’m sure the company has a phalanx of data analysts poring over projections and understand that the rate that customers buy downloads might not be in a freefall, but it could be coming quicker than anyone expects.
It’s pretty clear when it comes to the choice between buying downloads or using a streaming service, customers are beginning to choose streaming. But so far, Apple has sat out of the subscription music trend. After all, the Book of Jobs says that customers wanted to own rather than rent music.
Those days have passed. Apple needed to hedge their bets and get into streaming. But instead of building another bolt-on to iTunes as the company did with their underperforming radio service, Apple decided to speed their way to market by purchasing a hot new service that had a lot of buzz, but hadn’t scaled so much that it was prohibitively expensive. Beats is the most viable of all acquisition targets.
While music purchases may be falling, it’s still a big business for Apple. So instead of creating another option in iTunes that would potentially cannibalize download sales, why not just buy a service and keep it separate? Streaming blows up: Apple wins. Streaming doesn’t pan out, well, it will still have the iTunes store chugging along.
In The Cards
The second number refers to the 800 million iTunes accounts, most with credit cards on file. Those credit cards are the keys to the kingdom for anyone who wants to sell something in the store. Apple charges a 30 percent premium for companies to use their in-app purchasing system, where a customer can subscribe directly from the native app.
After Beats Music’s troubled launch period didn’t produce many subscribers from the 7-day trial, company executives were calling around to see how other firms dealt with the 30 percent Apple tax (answer—you eat the $3 per customer a month). In late April, Beats launched in-app purchase and the results were stunning. Their iOS app became the number one overall free app.
Just as important as in-app purchase is getting featured in the iTunes store. Placement in the iTunes store can make a hit out of an app and can mean hundreds of thousands of downloads. Combined with in-app purchase, the store is a kingmaker that can make or break a company. So once Apple integrates the Beats app, it wouldn’t be surprising that the app will get a permanent featured position in the store. Cha-ching.
Oh, and that $3.2 billion price tag? With Beats Electronics’ hardware business already creating significant profits, Apple’s purchase price could be covered within a couple years. So in essence the company is getting into streaming music for a song.
More Acquiring Minds
Re/Code: Why Apple Is Betting Big On Beats
Apple Insider: Jimmy Iovine Set To Join Apple?
Congratulations subscription music! You are finally a billion-dollar industry. The IFPI, the trade organization for the worldwide recorded music industry, last week reported that subscription streaming music revenues finally broke the billion dollar mark in 2013. Let’s mark this moment. It’s a huge number for the industry and at long last a confirmation of what many of us who have worked on the streaming side have believed in ever since Rhapsody launched as the first legal service in 2003.
Yet with all the congratulatory backslapping and shaking of hands, dark clouds still threaten to limit what subscription music could become. Why? The secrets are revealed in the data, my friends. You see, subscription streaming might be the same product around the world, but the business results have varied. While perhaps not by design, markets are delivering vastly different revenues and subscribers.
The US market is creating a great deal of revenue, but it hasn’t caught on as a mainstream product. Outside of the US the goal seems much less about revenue—it’s about bundling the service with other providers. Additionally rightsholders seem to be much more willing to experiment with other models in the rest of the world rather than the good ol’ US of A.
Negotiation Before Innovation
As a product manager for a streaming service spends a lot of time obsessing about what people value. We research of what customers do daily and what causes them open their pocketbooks. Then we craft product concepts that potentially could satisfy those needs. In a past life I had one of those jobs where I would take these ideas and package them up for presentation in front of the labels in order to gain licenses. You might think ‘oh, you already have a license to a catalog of music, so why do you need anything else.’ Well, every functionality and technical detail must go through a vetting and approval process with labels. And that’s where this gets interesting.
Just for fun, let’s say I’ve just created a service that allows a user play anything from a 20 million song catalog for free on demand while you listen on a laptop. But if you pay $3 a month, we’ll automatically save the top 100 songs you’ve played to your phone. It’s simple: download the app onto your phone and based on what you play on your laptop, we’ll automagically save ‘em on your phone. Just for fun, let’s name it something cute like The Roo, as in Kangeroo, because it saves favorite songs in its mobile pouch. My logo is a cuddly ‘Roo wearing headphones and holding a mobile phone.
For the record, I’ve never pitched The Roo to anyone. I just made it up. But I can imagine the feedback I’d get from the label representatives. The first thing I’d hear is that I’m really pitching a freemium product, which has a different cost to a service than a premium product. After all, there is a cost to giving away a bunch of music as a marketing ploy to attract users. I might also hear that The Roo gives away too much value compared to other products that are already in the marketplace at that price point, like premium radio. And finally I’d probably hear how I’m “giving away” the equivalent of 10 albums a month for $3.
In my tenure I’ve pitched dozens and dozens of these ideas and very few even get past the first round of negotiation. Major labels in particular keep a tight rein on what is in the market by not granting licenses for new ideas. And I don’t think my experience was unique. While trading war stories with colleagues in the industry it’s pretty clear we’ve all had similar meetings.
Trust me, they’re not all good ideas—most of the are probably just as lame-brained as The Roo and deserve not to see the light of day. Yet the approach of startups and rightsholders does shine a light on how each party approaches new products. Most of the startups focus on creating products that will attract the attention of the customer. The best ones work hard on getting those users to pay something, anything, for music. Labels seem to be more focused on protecting current revenues and current products, and seem terrified of upsetting the price floor.
So where does that leave the US market? Only 6.1 million subscribed to a service last year–21 percent of the estimated worldwide 28 million. Meanwhile a whopping 57 percent of all worldwide revenues come from those 6.1 million customers. That works out to $102 per customer, while the rest of the world–$22 a person.
So at least in the US, we are creating a very small subclass of customers who are contributing lots of revenue, but we’re not creating enough consumers of subscription services. We’ve built two tiers of products: free and very expensive. And that’s just not the way people think about music. There are probably hundreds of ideas for paid on-demand products that might find an audience. Instead of licensing tons of them and let the market sort itself out, we only license a couple models and call it a day.
Labels seem to be willing to try other models outside of the US, though. For a £1 a week O2 Tracks lets you listen to any song in the Top 40 on your phone. With Bloom.fm you can download 20, 200 or unlimited number of songs to your phone at varying price points. The United States is the crown jewel of the music business, and the industry treats it as such, at the expense of innovative digital music products.
Music With Plenty of Limits
There are of course many other factors. In the rest of the world, cell phone companies compete much more aggressively with services. Nearly every carrier in Europe has a bundled music service offering from Spotify, Deezer or Napster. The only true bundled offering in the US is MuveMusic, while MetroPCS and AT&T have offerings that are billed on top of the price of the phone service.
The cell carrier duopoly of AT&T and Verizon, who lock up customers in long term contracts, have been less than willing to share the costs of music with startups and labels. That won’t last forever. T-Mobile has declared war against the contract. Perhaps if the company makes a strong move into the market it could spur growth and motivate the entire industry.
If our goal as an industry is to protect the revenues we have today instead of growing a class of customers who will pay anywhere from $1 up to $20 for different valued package of services, we’ll probably hear the same story for the next several years.
NPD estimates 44 million US customers bought digital music in 2012. If streaming subscription could build up to 20 million paying customers, we might not greatly increase the subscription revenues of today, but we will build a new generation of customers who start to value paid music services, and maybe even become delighted with features that solve their problems. With time, the revenues will follow.
And if anyone wants to invest the $25 million needed to start up The Roo, drop me an email. I’ll start writing the business plan now.
More Growing Concerns
RIAA: US 2013 Revenue Report
Music Industry Blog: First Take on 2013 Numbers